GST on Developments and the 5 year rule

Discussion in 'Accounting & Tax' started by [email protected], 9th Jan, 2020.

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  1. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Many budding developers see that GST is payable on their new dev and seek to avoid this by choosing to retain the property for 5 years to rent and then GST doesnt apply.

    This can come with a few traps.
    1. The GST on the land or the build may cease to be creditable and impact profit (reduce it); and
    2. The decision to defer for 5 years is often changed. In many instances the GST on the land and the build may lapse and cease to be creditable;
    3. The taxpayer may have made a decision without considering the Margin Scheme which may substantially reduce GST On the sale and allow almost all the GST on the land and build to be creditable. Often leaving little net GST payable.
    4. Depreciation schedules may be impacted. Unclaimed GST will be a element of the cost of the respective Div 40 and Div 43 asset.

    1-2. When does GST on the land and the build cease to be creditable? Bad news peeps. Its different to the GST on the sale. Its not 5 years. Possibly not even 4 years. GST credits expire 4 years and 28 days after the end of the quarter in which the payment for the land or the build cost is paid.

    eg Darth buys a lot of land and pays $440K inc of GST in May 2016. IN September 2017 he pays the builder $110,000 and in december 2017 pays $110,000 and in March 2018 pays a final amount of $135,000. Darth's GST credits will expire in the respective June 2020, September 2020, December 2020 and March 2020 BAS.

    But when GST tax credits expire it increases the build cost by the GST amount lost. This reduces taxable profit.

    3. Using the Margin Scheme.
    Darth may have made a decision about GST thinking that if he sells the new build for $1.6m that $145,454 of GST will be payable. However he may have overlooked that the GST On the land and build (and others costs) will reduce this to at least $72k.

    If the margin scheme was used the GST may be reduced further. The margin scheme GST would be based on the sale price less the land cost ie $109K a further saving of $36K leaving total GST at just $36K.

    The difference between $145K and $36K means Darth is now armed with knowledge and he seek real estate opinion which says buyers prefer brand new dwellings and a new dwelling v a used one could have a $100K price drop. So the $36K of GST means a extra $100K in sales value. His friend Yoda describes this as "Sell as you must"

    4. If Darth keeps it - What does he need in the way of records ?
    All developers who plan to keep property should ALWAYS retain records of the total costs that indicate the date every single payment is made. The info should also show ABNs (for the Reportable Payments Reporting each year !!) and keep records of the total amount, the GST included and any apportionment. This info will be used for:
    • GST calcs and BAS preparation
    • Tax (profit) calcs that are based on GST exclusive values when claimed
    • Reportable Payments Reporting
    • ATO audit enquiries ie Provide your three largest invoices in the Dec 2018 quarter as well as summary of all your build costs
    The summary also acts as a suitable basis to file original tax invoices which must be available for a GST claim and audit. Review is becoming more common place after the GST withholding regime was implemented.

    A copy of our developer worksheet with examples is provided. This is a simple version and is tailored to suit each client specific project when we provide advice.
     

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  2. Hamish Blair

    Hamish Blair Well-Known Member

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    Luke builds an underground house in Tatooine as an investment property. He is not registered for GST, but that's OK - he rents the property out.

    Four years later, concerned about the rising threat from the dark side, he decides to sell.

    If this is a mere realisation of an asset, is he still liable for GST on the sale? Even if he is not registered for GST?

    If he is liable, what is the best course of action? Register and sell via the margin scheme? Can the unclaimed GST now be claimed or at least offset against any GST payable (under the MS)?
     
  3. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Mere realisation is a CGT concept. Is the asset a CGT asset ? Or a revenue asset ? It will be one or the other. But if its not a CGT asset at the outset it likely cant commence to be one !!

    Why did Like build ? If he did so as part of an isolated profit making enterprise then GST issues and ordinary income issues may prevail even if he later had a change of mind. eg Luke may have considered it was away to build wealth and he planned to sell but due to poor market conditions he held it for 4 years. Or he may have built the home to live with his GF Leia and then have kids. He then learned she was a sister soon after they had a pash and was horrified and the tart left him for some pirate bandit called Han. So he had no enterprise and the asset was always intended to be a CGT asset as his home. Then it may even also be tax exempt even if he moved out for under 6 years and rented it. He couldnt face thinking of that moment he pashed his sister Luke should seek tax advice on his specific intentions at the time of buying the land and building. These are often disclosed in loan applications etc.

    A sale of a"newly constructed resi premises" is also subject to vendor GST withholding and a buyers solicitor may seek to confirm the risk their client may incur a tax problem.
     
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  4. MTR

    MTR Material Girl Premium Member

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    Am I screwed .... I purchased a property (resi) 5 years ago, it has been rented out during this period

    Today I am considering developing this property, however, this property was not purchased using the margin scheme.
     
  5. Mike A

    Mike A Accountant Business Member

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    And once they start renting they have a Division 129 GST adjustment and have to start paying back GST credits they claimed along the way
     
  6. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Existing resi wont have GST issues when you bought it and if it did (I doubt) then the tax credits lapsed a year back. All development proposals should seek tax advice on the specifics so your planning and costings now correctly consider taxes. Taxes like GST etc impact profit. I often see people who tell me they made a small profit to then realise after GST they lost money. The ATO is always your silent partner

    The margin scheme may or may not be available. But lets assume it can. This suggests you will sell. What occurs with the accrued gain up to the time when the property is then used as land to build ? Do you know if and how scrapping may impact ? Do you understand the new holding period deduction rules ?
     
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  7. MTR

    MTR Material Girl Premium Member

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    Thanks Paul. Agree tax advice required prior to developing.

    I had this project on the back burner as the market softened and the numbers no longer stacked up, now reviewing my options. There has been no gains on this property.

    I did not stipulate I was going to use the margin scheme on the sales contract, so I am pretty sure from what I have read I wont be able to go down this route. Which is going to cost me dearly. …. oops

    I don't know how scrapping will impact, not looked at this? However, perhaps I could claw back some $ using this

    No idea on the new holding period deductions rules??

    Thanks
     
  8. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    That issue with the margin scheme isnt true. It can be corrected. I wouldnt wait. And....only occurs and applies at sale.

    In my experience I find is that not right more will follow like the tax invoice expiry rule etc. Or just poor record keeping. Depends. Scrapping typically only applies where a building is demo and rebuilt to earn income each side of the events....But Div 40 plant items may be scrapped when they end their effective life.. eg old AC unit is binned, HWS etc.
     
    Last edited: 10th Jan, 2020
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    The margin scheme applies when you sell.
     
  10. MTR

    MTR Material Girl Premium Member

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    Heard this before.

    I phoned ATO and have had two ATO experts give me two different answers on the same day... so confused. According to link I am not eligible as I did not mention the margin scheme in the sales contract.
    I have used margin scheme before in previous developments and it was mentioned on sales contract when I purchased property. Not sure how I over looked this … oh dear

    GST and the margin scheme


    I will still go ahead with the project regardless, but more profits better in my pocket
     
    Last edited: 10th Jan, 2020
  11. MTR

    MTR Material Girl Premium Member

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    How do you correct this??. I just posted ATO take on it.
    thanks
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    which paragraph says this?
     
  13. MTR

    MTR Material Girl Premium Member

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    Under Eligibility to use Margin Scheme

    You cannot use the margin scheme if, when you first purchased the property, the sale to you was fully taxable and the margin scheme was not used.
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Was the property purchased fully taxable?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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  16. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    It is referring to the Vendor (people you bought it off) and their GST claims on the sale contract. AFAIK if you have purchased it and there was no mention of the sale being plus GST, full GST or margin scheme by the vendor then you are eligible to claim whichever scheme you want after developing on your sales contracts
     
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  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    usually residential property is input taxed - no GST is charge so it would not be fully taxable.

    But this may not always be the case.
     
  18. Mike A

    Mike A Accountant Business Member

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    Considered legal advice looking at the original contract for sale would probably determine if it was eligible.
     
    Last edited: 11th Jan, 2020
  19. MTR

    MTR Material Girl Premium Member

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    I purchased from a couple, no GST, no margin mentioned just a typical residential sale.

    So when you purchase property with a view of developing do you mention margin scheme in the sales contract?
    I understand when selling I use the margin scheme but according ATO unless it has been stipulated in the original sales contract I don't believe I am eligible to use the margin scheme
     
    Last edited: 11th Jan, 2020
  20. MTR

    MTR Material Girl Premium Member

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    I wont go down the legal advise no point

    As I mentioned I did not enter margin scheme on the sales contract when I originally purchased the property. My issue is the fact that not even ATO know??? this is ridiculous.
    My accountant comes back next week so hopefully he will clarify.